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A new unbiased additive robust volatility estimation using extreme values of asset prices

Author

Listed:
  • Muneer Shaik

    (Institute for Financial Management and Research
    Krea University)

  • S. Maheswaran

    (Institute for Financial Management and Research)

Abstract

We propose a new unbiased robust volatility estimator based on extreme values of asset prices. We show that the proposed Add Extreme Value Robust Volatility Estimator (AEVRVE) is unbiased and is 2–3 times more efficient relative to the Classical Robust Volatility Estimator (CRVE). We put forth a novel procedure to remove the downward bias present in the data even without increasing the number of steps in the stock price path. We perform Monte Carlo simulation experiments to show the properties of unbiasedness and efficiency. The proposed estimator remains exactly unbiased relative to the standard robust volatility estimator in the empirical data based on global stock indices namely CAC 40, DOW, IBOVESPA, NIKKEI, S&P 500 and SET 50.

Suggested Citation

  • Muneer Shaik & S. Maheswaran, 2020. "A new unbiased additive robust volatility estimation using extreme values of asset prices," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(3), pages 313-347, September.
    • Handle: RePEc:kap:fmktpm:v:34:y:2020:i:3:d:10.1007_s11408-020-00355-3
    DOI: 10.1007/s11408-020-00355-3
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    References listed on IDEAS

    as
    1. Kumar, Dilip & Maheswaran, S., 2014. "A reflection principle for a random walk with implications for volatility estimation using extreme values of asset prices," Economic Modelling, Elsevier, vol. 38(C), pages 33-44.
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    4. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
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    6. Kunitomo, Naoto, 1992. "Improving the Parkinson Method of Estimating Security Price Volatilities," The Journal of Business, University of Chicago Press, vol. 65(2), pages 295-302, April.
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    More about this item

    Keywords

    Robust volatility ratio; Efficiency; Bias; Volatility estimators; Monte Carlo simulation; Extreme values of asset prices;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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